Wednesday, June 07, 2017

SELF INTEREST IS NOT SELFISHNESS

Adam Smith’s ‘The Wealth of Nations’ (WON) was published in 1776, the year the US gained independence. Before that, Smith was a diminutive professor of moral philosophy at the University of Edinburgh. But this book propelled him to a kind of stardom from which there has been no retreat, even centuries after his death. Today, Smith is known as the father of economics and his book is viewed as the bible of economics.

Although the book and its contents were quiet a revelation at that time, there is one concept that still stands out: the ‘invisible hand’ and it is working. Many tie this invisible hand to the moral decay that besets today’s capitalism. Is this true? Let’s contemplate.

The first misnomer that one encounters is linking the invisible hand concept to WON. In fact, the concept first appears in ‘Theory of Moral Sentiments’, a book as important as the former but lesser known. This book was all about the importance of moral criteria like compassion and empathy for the working of a society and the economy. The invisible hand makes an appearance and it reads as follows:

“[The rich] consume little more than the poor and in spite of their natural selfishness and rapacity…they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life ...”

In WON, Smith contends that:

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest…”

and

“Every individual... neither intends to promote the public interest nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention”.

There are a few noticeable aspects of these paragraphs. One, it’s the greed and selfishness of individuals that indirectly promotes a better society through the invisible hand. Second, it is unintentional. Third, Smith first mentioned this concept in theory of moral sentiments, which cannot be just a coincidence. He tied the working of the invisible hand and laissez faire capitalism to morality. He did not envision the wealth of nations accruing separately from the moral foundations of a society. In fact, that development had to complement it.

But what if it is not unintentional – without any moral compunction – and the pursuit of self-interest actually leads to less enviable outcomes for the economy and society? History is full of conquerors, for example, who laid waste to cities just to satiate their greed for more land. Surely, one person’s self-interest and greed turns out to be bad for other people. And that is so because they are not grounded in morality.

In our times – since the last quarter of the 20th century and after – there has been a precipitous rise in the kind of greed that has no moral grounding. Ask yourself, what forced millions of people to throng the streets a few years ago in the main street vs Wall Street stand-off? It was the crass thuggery of the financial elite. Their ‘financial engineering’ (utilising peoples’ money) led to the disaster that is the great recession, which caused millions to lose their jobs without them having any role in this debacle. As they suffer, this elite along with its stratospheric incomes and privileges remains untouched, non-repentant and unblemished.

Whether it is the 1987 stock market crash or the fall of two financial investment firms that heralded a horrendous period of economic misery of the last decade, it is the insatiable greed of a few that has put millions in misery. Read reports on the recession, watch movies like Big Short, or analyse how financial firms tried to cheat people by manipulating interest rates (the LIBOR scandal), and it could be easily discerned that pursuit of self-interest has taken a rather treacherous turn.

The financial industry is but one example of how the pursuit of destructive self-interest is now a threat to capitalism that has delivered so much for humanity over time. But there could no bigger fallacy than to tie it to Smith’s idea of the invisible hand, which never stood aloof from the good of society. If he were alive today, he would have been despondent and aghast to realise that his idea has been tied to the kind of destructive greed that is running amok.

How greed came to be accepted as part of economic activity is another story, worth another column. For now, we need to recognise that modern capitalism’s sorry predicament reflects the system’s failure to check the galloping greed. But this was not always so. Historically, if we just go by numbers, the bounties that capitalism’s working have wrought are innumerable and have benefitted humanity tremendously. From printing press to the steam engine and to the social media of today, capitalism’s imprint is formidable.

One of the most widely circulated graphs that is doing rounds in the social media nowadays is the enormous decline in absolute poverty world over since 1800, which would not have been possible if it were not for economies adhering to the capitalist mode of functioning.

Today’s challenge for capitalism, though, is that the system that benefitted everybody over time has more or less become dysfunctional. Concentration of wealth has assumed worrying proportions with little signs of the system addressing this fault. Another shock to the system by this unfettered greed – like the one in 2008 – would effectively end capitalism’s reign. Smith and his concepts can hardly be blamed for this state of affairs.

Shaid Mohmand has written an erudite account of the role of Adam Smith (1723-90) as a moral philosopher and political economist. His essay contains some creditable thinking related to modern times. Unfortunately, it also contains factual errors as well.

Adam Smith was never a professor at Edinburgh University. His sole professorship was entirely at the University of Glasgow, a city about 41 miles west from Edinburgh. “Stardom” did not feature in public llife in the 18th century as it does in the 21st.

His Wealth of Nations (1776; 5th edition 1789)certainly led to a sort of prominance among academics and politicians during his lifetime, supported by his lesser known volume, The Theory of Moral Sentiments (1759; 6th edition, 1790).

He is much better known today - even world-wide - than he was during his lifetime. Millions today know of an Adam Smith, often for reasons unrecognisable to those who know of the authentic Adam Smith, born in Kirkcaldy, Fife, Scotland in 1723 and who died in Edinburgh in 1790.

Even leading scholars, let alone the general media, equate the modern version of Adam Smith with the “invisible hand”, upon which has been erected a false perspective of a capitalism in which the “invisible hand” plays a major role, and all credited to Smith’s celebrated genius.

Yet some strange facts remain unanwered in these modern versions of Adam Smith and “an invisible hand”:

How is it that while the authentic Adam Smith was alive nobody referred to his metaphoric use of “an invisible hand”, once each in his two books?

Moreover, for 80 years after his death in 1790, none of the leading political economists (Ricardo, Mill, etc) who produced their own major volumes on political economy in the 19th century mentioned Adam Smith’s use of “an invisible hand” metaphor? Contrast this lack of mentions with the fact that of the thousands (tens of thousands?) of books and articles galore on economics published in the 20th and 21st centurtes, very few, if any, fail to mention “Adam Smith’s invisible hand”?

Should we not be cautious about attributing to the Authentic Adam Smith ideas he never had? He did not equate moral turpitude with self-interest. Paul Samuelson was wrong to assert that Smith believed that selfish actions via “an invisible hand” were fundamental to market activities (Samuelson, Economics, 1948). Which in 19 editions were read and believed by millions of undergraduate economists and continue to mislead ever more people today.

Shahid Mohmand has uncritically bought into the modern myths of Adam Smith’s metaphoric use the invisible hand. T’is a pity. He is a clear writer and almost certainly entirely innocent of the modern deceptions about Adam Smith. His talents would be better used in presenting the authentic Adam Smith from Kirkcaldy in place of the comic book, Adam Smith from the imagination of Paul Samuelson